Time Value of Money in Financial Management Decisions

Running head: ESSAY 0
BUSINESS FINANCE
MAY 22, 2019
STUDENT DETAILS:

ESSAY 1
Time value of money refers to the perception that money available by a present time is more
valuable than the indistinguishable sum in future, due to possible earning ability. The core
principle of finance says that provided money can get interests. TVM is also occasionally
considered as current discounted value. The time value of money draws from the model that
sensible investor prefers to get money currently instead of the similar amount of money in an
upcoming period due to potential of money to develop in the values to the provided period.
For an instance, the amount deposited in the saving account earns the some rate of interest
and thus is said to be compounding in values. In the following parts, the implementation of
concept of time value in different financial management decisions is discussed and critically
examined.
The time value of money is the significant economic concept. It is fundamentally stated by
time value of money theory that cash in hand nowadays is valuable in comparison of the
same amount of money in future. Simply put one dollar today is worthy more than one dollar
in an upcoming period. It is because of the potential the present money has to get additional
money. Therefore, time value of money concept is considered as significant concept for
having proper knowledge and for taking relevant decisions related to finance. All the
problems related to time value of money covers 5 variables such as future value, present
value, rate of interest, number of period and payment amount. The Present Value refers to the
amount people have nowadays. Further, the Future Value means the amount having by
people at certain points in the upcoming period. The number of periods is the amount of time
for which the investment is made. The interest rate is considered as charge for borrowing
money. Additionally, the payment amount is the series of similarly spaced payment (Kundu,
2016).

ESSAY 2
Further, the today’s money to that of tomorrow due to persuasive requirements for
consumption and moderation’s cost from the present consumption; fall in a tomorrow’s value
of money due to the rise in price and conceivable usage of money at time of exchanging for
tomorrow’s money. Therefore, while advancing the money, one will sacrifice advantages of
ready usability, liquidity, unrelenting requirements, as well as security. People refrain from
the present consumption when advance money to other person, otherwise made investment. It
will consider that what is entitled time inclination regarding money. For reimbursing, future
money would be discounted to current period, as both are not similar. The future money will
be the 130, in a case when present money is 100, considering the discount rate 30%, over 1
year (Mohanty, 2016).
The Compounding is useful to have knowledge of future value of cash flow, in ending of
specific period, at the certain rates. In the contradiction of this, discounting is useful to know
the the PV of future cash flow at the specific rate of interest. In this way, it can say that
compounding differs from discounting. The money of tomorrow or money the year
henceforth is required to be discounted to a current period by discount rate proper as the
reward for the sacrifice discussed before. It is known as discounting, utilised on behalf of
dividend and cash flow to be attained in the upcoming period and to be determined in respect
of present. In the same way, the today’s investment, if this is to be come back after the period
or so, the money of today has to be compounded by a discount rate to equate to upcoming
period funds likely to be present in returns. It is considered as compounding. The discounting
as well as compounding are therefore 2 main approaches of assessing the TMV. Hence, it is
rational for using discounting technique instead of compounding technique in taking
decisions (Joshi, 2019).
The discount rate contains the 2 components. These two components of discount rate include
the risk free rate of return and premium regarding risks supposed in owning and running the